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Category-III funds include those AIFs which employ complex trading strategies and may invest in both listed and unlisted derivatives. These include hedge funds and private investment in public equity deals (PIPE).
A pass-through status is given to avoid double taxation. An entity usually pays tax twice — once for the income generated by the firm’s shareholders and another at a corporate level, which is corporation tax. Under the pass-through status, the income generated is taxed in the hands of the investor, and the fund itself does not have to pay tax on the same.
The other categories of AIFs already enjoy this status.
“This will align with global best practices where commingled funds have an EET (investors pay tax on distribution) or ETE (investors pay tax when the fund earns income) regime, with taxation at the investor level,” said IVCA in the report.
The association has suggested the introduction of attribution rules to tax income attributable to non-resident investors at the fund level while limiting their participation to up to 10 per cent of the corpus at the same time to avail the pass-through status. It has also suggested providing the pass-through to long-only funds.
“This will promote the growth of long-only funds and attract domestic institutional capital from insurance companies, pension funds, and banks into long-short hedged strategies,” the report notes.
As per the estimate of the AIF industry, category III AIFs are expected to grow to Rs 2.5 trillion in commitments by 2028, with top players planning to cumulatively raise at least Rs 60,000 crore over the next two years.
As of March 2024, the commitments raised for category III AIFs stood at Rs 1.45 trillion.
Further, the industry association has also batted for the removal of the 25 per cent limit for investment in unlisted securities for retail funds launched by registered fund management entities in Gift-IFSC.
“While these restrictions are intended to mitigate liquidity risk, they may also act as a roadblock, specifically in cases where IFSC funds are proposed to be set up as feeder funds for global funds. For greater flexibility and broader investment potential, the IFSCA should explore options such as removing this cap entirely or exempting investments in unlisted securities where the underlying asset is listed from the 25 per cent limit,” submitted IVCA.
First Published: Jul 11 2024 | 6:14 PM IST
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